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4/20/17
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San Diego’s industrial market continued its overall momentum, reporting its 23rd consecutive quarter of positive net absorption (occupancy growth), according to the latest research provided to us by eal estate services firm Cushman & Wakefield. Carlsbad was a standout submarket, outperforming all other submarkets in terms of occupancy growth. Scripps, Oceanside and Rancho Bernardo were also among the top growth submarkets.
Economy
Economic activity in the manufacturing sector expanded in March, with an ISM index reading of 57.2%. The overall economy grew for the 94th consecutive month in the U.S. The headlines behind the March manufacturing ISM report were “new orders, production and employment growing, supplier deliveries slowing and inventories contracting”. All 18 manufacturing industries reported growth in new orders while the price index increased 2.5 percentage points to 70.5% in March, indicating an increase in the price of raw materials for the 13th consecutive month.
Vacancy
At the close of Q1 2017, overall industrial vacancy in the San Diego region stood at 5.1%, down 20 basis points from last quarter. According to Jolanta Campion, Director of Research in San Diego for C&W, vacancy for manufacturing (4.0%), distribution (4.8%) and R&D space (7.6%) each decreased 30 basis points from last quarter, while incubator multi-tenant space (IMT) saw a slight uptick of 10 bps to 4.6%.”
Occupancy
The market recorded 182k sf of positive net absorption in Q1 2017, signifying the 23rd consecutive quarter of industrial expansion, noted Dennis Visser, SIOR, Managing Director with Cushman & Wakefield in San Diego. During this time, tenants absorbed a total of 12.1 msf of space, an average of 525k sf per quarter. Notably, 2016 had represented the 7th consecutive year the industrial market achieved positive annual net absorption.
Carlsbad outperformed all other submarkets with 232k sf of net absorption in Q1 2017. Scripps, Oceanside and Rancho Bernardo were also among the top growth submarkets in the first quarter combining for over 155k sf of net absorption.
In contrast, Poway suffered the deepest loss with negative 127k sf to start the year largely due to Cohu, a manufacturer of semiconductor-testing products, vacating 192.6k sf as the company downsized its corporate headquarters into approximately 146.7k sf. Chula Vista, Kearny Mesa, Escondido and Sorrento Mesa were also among the submarkets to see modest occupancy losses.
In terms of product type, Manufacturing was the most active sector to kick off 2017 with 295.2k sf of net absorption.
Construction
In the first quarter if 2017, three industrial buildings were delivered totaling 178.3k sf, all in the growing North County market: Elevate buildings A (115.1k sf) and B (41.9k sf) in Carlsbad and Extension in Vista (21.4k sf). Of the newly delivered space, only 33% (58.2k sf) remains available.
Bryce Aberg, Executive Director in San Diego, said, “There is currently only approximately 1.0 msf under construction in nine buildings, which will not satisfy the region’s demand for new, functional space,” said Bryce Aberg, Executive Director for Cushman & Wakefield in San Diego. “According to our calculations, 57% of industrial space countywide was built before 1990 and only 2.3% of space was built after 2010. This means that more than half of leasable industrial buildings in San Diego are lacking modern design features for today’s demanding tenants who require high-functioning and efficiently designed product.”
Approximately 80%, or 702k sf, of the total space in development is found in Carlsbad. In Q1, construction started on three speculative projects here: Vector, Lot 17 at Carlsbad Oaks North and 2800 Loker Ave, with estimated completion in late 2017 and early 2018. Carlsbad continues to experience the highest level of construction activity due to its proximate location to a large skilled employee base and availability of developable land.
Asking Rents
The countywide average asking rent for all industrial product was $1.00 per square foot on a triple net basis, with warehouse/distribution averaging $0.76 and R&D/flex averaging $1.44. Comparing markets, both South County and Central County are up 6.1% from a year ago, while North County increased 5.7%.
“Rental increases are being driven by a competitive availability of modern industrial facilities, which still remain in short supply but in high demand,” Visser added. “As a result, we are also seeing the last remaining industrial parcels being developed with new distribution & manufacturing product and an increasing trend of renovation and modernization of older R&D/Flex product to make them more appealing to tenants.
Outlook
Campion concluded, “The current expansion is nearly eight years old as of the first quarter of 2017. The longest expansion in American history was a 10-year stretch in the 1990s. The probability of a recession in 2017 is low, ranging between 5% and 25%, depending on the source. Rising mortgage rates may present a bit of a challenge in 2017 and 2018, however, continued economic expansion and resulting job and income growth will continue to drive demand for high quality real estate by both users and investors.”
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